BENGALURU: Startups globally have raised close to $4 billion (Rs25,700 crore) through initial coin offerings (ICO), issuing digital tokens against funding through cryptocurrency, but more than a tenth of that, or $400 million, has been siphoned off by cyber criminals.
Professional services company EY analysed 372 ICO projects and found that more than 10% of the proceeds were intercepted and stolen by hackers. There have also been instances of data leaks where hackers got access to investor information provided to coin issuers.
ICO is an unregulated way of crowdfunding a startup. Founders raise money by issuing digital tokens in exchange for cryptocurrencies without transferring any equity. Investors can use the tokens to avail of the startup’s services in future.
Many new cryptocurrency ventures also raise funds this way. One of the advantages of ICOs for issuers is that they can bypass the rigorous capital-raising process associated with the formal route.
To take part in an ICO, participants usually have to register themselves giving their name, email ID, password and the ETH wallet address where they want to receive the tokens. Last month, Experty, a skype-like calling application on the blockchain, was hacked into, resulting in the loss of such data.
In the last one month alone, there have been three ICO hacks on consecutive days, resulting in a total loss of close to Rs 8 crore,” said Indrajeet Bhuyan, tech blogger and a security researcher. “Startups want to raise millions, but don’t want to spend on security.”
As per the report, the US, Russia, Singapore, and Mainland China led the pack with the most number of ICO projects in 2017. ET had previously reported that Indian startups too were skipping venture capital dollars to raise funds through ICOs, but the funding here is minuscule compared with global companies.
ICO valuation is often based on “fear of missing out” — the apprehension that others might have a rewarding experience from something where you are absent — and not project development forecasts and the nature of the token. A lack of fundamental valuation leads to extreme token price volatility in post-ICO trading.
ICO volume has been steadily slowing down since the start of 2017, and fewer projects are reaching fundraising goals. Globally, there have been 235 ICOs in 2017, raising more than $3.7 billion, according to ICO listing website Coinschedule.
The current market value of bitcoin, the most popular cryptocurrency, is around $6,000 each, falling from the highs of $19,000 a few months ago. “The market caps and valuations of some of these coins attracted earlier have in itself deflated. Be it in India or elsewhere, it is pretty much in parallel,” said Guru Malladi, partner, advisory services, EY India. “When the stock markets are down, will a company be interested in doing an IPO? When there is a bear run, not many will look for an ICO.”
The EY report also said most regulators were moving from ignoring ICOs to banning them or regulating them under existing laws in accordance with the nature of the token. Market players are also developing self-regulation — in India, for instance, by meeting full e-KYC requirements.
Last week, finance minister Arun Jaitley reiterated the government’s stance that cryptocurrencies were not valid legal tender and announced a crackdown on illegitimate transactions that use crypto assets. Experts say such measures are good for the crypto community in the long run.